Financial Instrument Case Study

Question 1 Index observation date | Scenario 1 Closing level of S&P/ASX 200 Index | Scenario 2 Closing level of S&P/ASX 200 Index | Scenario 3 Closing level of S&P/ASX 200 Index | 9 December 2013 | 3,847.050 | 5,641.000 | 7,662.310 | 9 January 2014 | 3,803.930 | 5,705.370 | 7,916.180 | 10 February 2014 | 3,821.420 | 5,622.830 | 8,133.700 | 10 March 2014 | 3,811.580 | 5,623.730 | 8,294.210 | 9 April 2014 | 3,733.190 | 5,785.730 | 8,868.370 | 9 May 2014 | 3,732.870 | 5,862.420 | 8,620.520 | 10 June 2014 | 3,771.800 | 5,928.520 | 8,831.430 | Arithmetic Average | 3,788.834 | 5,738.514 | 8,332.389 | Initial investment | 100,000.00 | 100,000.00 | 100,000.00 | Initial index level | 4,637.893 | 4,637.893 | 4,637.893 | S&P/ASX index return | -18.31% | 23.73% | 79.66% | Investor's return at maturity | 0.00% | 23.73% | 70.00% | Payoff at maturity | 100,000.00 | 123,731.06 | 170,000.00 |

Question 2
HSBC 100+ Series S&P/ASX 200 Linked Investment can be decomposed to the zero coupon bond(face value : $10,000, interest rate 6% per annum annually compounded), bought call option of price AUD705.2 for the capital protection under S&P 200 index of 4,637.893 and written call option of price AUD40.9 for the return cap level over S&P 200 index of 7,884.418.

The return is based on 7 months’ arithmetic average index. In order to create the similar option payoff, instead of using American or European Options, a similar form of Asian options could be used to determine the maturity payoffs of the options. And this type of options can have benefits to both investors and HSBC.

a) The benefits to the investor
Investors can enjoy returns with lower volatility. Because the process of determining the exercise price is dependent upon the arithmetic average of the index of 7 particular days during 7 month with 30 days of interval, extremely volatile results due to the daily fluctuation of the market can be reasonably avoided.